DMPQ- Briefly describe the concept of micro finance. Also discuss the role of SHG (Self help groups) movement in India’s micro finance sector.

. Micro finance institutions, as a concept have their genesis in  Bangladesh, pioneered by Mohammed Yunus, for which he was awarded the Nobel Prize, as  successful institutions for reaching out to the last unit of any economy not possible through  banks and directly contributing to the uplift of the poor especially rural women.

In India, the SHG movement started in 1992 under NABARD and with involvement  of banks. Under the SHG scheme credit is linked to savings by focusing on capacity  building, with low interest rates usually 8-10 per cent with monthly repayment but  responsibility of the group and not individuals. SHGs in India cover 90 million poor  households and have extended credit of ver  5,000 crore.

Micro Finance Institutions (MFIs) are institutions which provide credit to the poor  but at a high interest rate but lower than that charged by the money lenders. MFIs in  India have engaged the attention of the government only since 2003 and in the last 7  years, have een an exponential exponential expansion to reach 30 million and credit of over ₹ 30,000 crore. These have been seen as partnering SHGs in micro finance in India and also a major way through which the country could provide ‘financial inclusion’, that is, to provide accessibility to organized sources of finance to the poor people and reduce their dependence on the money lenders for their income generating activities enabling them to have source of income ,employment and also get out of poverty.

However, in recent times, MFIs, have given a new  dimension and raised the following fundamental issues:

  • Their prime motive is to earn profits through high profit margins by charging high interest rates but slightly lower than that charged by the money lenders.
  • MFIs have reached out to those ignored by the banks and also the fact they are not complementing the efforts of the banks. There is sizeable concentration of MFIs in  areas where there is banking penetration.
  • MFIs are finding softer options of lending like SHGs, which leads to multiple financing, debt burden on the borrowers.
  • MFI are aggressive and are more consumer-oriented loans, less productive-oriented, similar like a private bank selling consumer loans or the US banks’ lending to sub­ prime borrowers.
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